Your bank account now contains $105+$5.25=$110.25.Īt the end of the third year, you again get 5% of $110.25 (=$5.51) added to your account. ![]() So you now get 5% of $105 (=$5.25) added to your account. In other words, your bank account now contains $105.Īt the end of the second year, you will earn interest on this compounded amount (not just your initial deposit). Let’s say you initially deposit $100 to a bank that offers an interest rate of 5% compounded yearly.Īt the end of the first year, 5% of $100 (=$5) gets added as an interest to your initial amount. To understand the concept, let’s take an example. Since you are having the interest compounded with the passage of time, your initial sum grows at a much faster rate than the simple interest (which only applies to the principal amount). You can think of compound interest as a sort of ‘interest on interest’. Using the FV Function to Calculate Compound Interest in ExcelĬompound interest is the interest on both the initial principal amount, as well as the interest accumulated over the past periods. ![]()
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